Industrial’s strengths will extend its innings

This three-building, 132,930-square foot property in Schiller Park, Illinois is indicative of the flexibility inherent in the industrial sector that should help it to ride out any dip in the economy.

Over the past two decades, the industrial sector has gone from benchwarmer to cleanup hitter. At this point in the year, and this late in the cycle, are commercial real estate investors still looking to send this asset class up to bat?

Blackstone Group’s recent $18.7 billion bet on 179 million square feet of logistics space is proof that industrial buildings—especially the big box structures that support the infrastructure of our e-commerce economy—should remain appealing for years to come.

“The wind still feels to be at the back and I would say that nationally, there’s not a bad market,” said Cliff Booth, principal, founder and CEO, Westmount Realty Capital. “Certainly some markets are a little bit stronger, but e-commerce is occurring in big towns and small towns.”

For the last few years, everyone in CRE has been trying to define what inning of this development cycle we are in. Even if we are in extras and the game will wind down any minute, the same may not be true for the industrial sector.

According to a recent report from the U.S. Commerce Department, online sales in February accounted for 11.8 percent of market share, narrowly edging out merchandise sales for the first time ever. Total brick-and-mortar sales remain higher when other categories such as auto and restaurant retail are added in. Despite this new record for online sales, occupying less than 12 percent of market share suggests that the sector has more gas in the tank.

“The economy may tighten up a bit or slow down, there may even be a bigger crush here and there, but I don’t see those things fundamentally changing the industrial sector,” said Booth. “I don’t see a slowing economy changing the trajectory of the use of industrial space, our shopping patterns or the need for these buildings.”

But this is a diverse sector, and it’s not just large logistics warehouses that will perform well. Westmount specializes in multi-tenant, light industrial properties. Of the assets that comprise their Chicago portfolio, almost all are infill properties in the O’Hare submarket.

“Those buildings still have many uses that are not necessarily related to e-commerce,” Booth said. “They’re much more about their locations, proximity to customers, employees, decision makers, major arteries, shipping corridors, airports.”

The range of tenants that go into these buildings is much wider than new, state-of-the-art warehouses going up in the I-80 corridor. This flexibility has always allowed investors in these types of structures to survive downturns in the economy.

“The other thing is there is little or no construction in that sector nationally. In fact, some of those buildings are being demolished around the country,” Booth said. “Chicago O’Hare is a great example. In great locations like that, there’s no land so developers are trying to assemble enough land to build state-of-the-art buildings. The inventory is actually decreasing.”

Another advantage is that, unlike high-rise developments, the time to construction for an industrial deal is much quicker. A new office or multifamily building might break ground in one economic environment and wrap up in another, where the expected rents may not be as forthcoming. That risk is lessened for new warehouse development.

“You can pull the trigger on an industrial deal, construction-wise, and complete it in a much quicker time period than you can with a high-rise building,” said Booth, “so you have a little more visibility about where the economy is.”

Currently, Westmount is looking for off-market deals, ideally for Class B multi-tenant space in Chicago’s western submarkets, especially those with lower taxes. According to Booth, the firm remains bullish on O’Hare and has identified south Cook County as an overlooked but well-performing submarket.

The firm is also making capital improvements on assets to attract new users. Westmount owns 3701-3749 N. 25th in Schiller Park, Illinois, a three-building, 132,930-square foot complex on 2.5 acres. Following the installation of LED lighting, renovated office areas and new building façades, the property is now 95 percent leased.

Since the advent of online shopping, the industrial sector has gone from loveable loser to top of the standings. But for a number of factors—not least of which the American consumer’s growing use of e-commerce—it doesn’t appear that this asset class will lose its prominence anytime soon.